Why The Rich Get Richer: An Entirely Different Perspective

Money begets money, but let’s not have the little green-eyed monster eat us.

It’s an age old question: how do the rich get richer? Here are some reasons (beyond the rather predictable power of compounding) that may explain this economic phenomenon:

A Few Basic Reasons For Why The Rich Get Richer

The rich have started successful businesses.
They do it by starting their own business. They have taken the leap and reaped the benefits of taking that entrepreneurial risk. It becomes a vital cycle: start a business, make money, start another business, make even more money.

The rich get tax breaks.
You get tax breaks when you’re rich. This is usually the case because the rich are business people and business people get tax breaks.

The rich are paid higher and higher salaries while regular people don’t.
In this capitalist society, the experts tend to get paid disproportionately more than ordinary folk. We see how the best chefs are glamorized, a stark juxtaposition against short order cooking and burger flipping; the same gaps exist between the major league ball players vs minor league foks; CEOs vs lower-rung management. We all get rewarded by where we sit in the career / talent / contribution hierarchy.

With all the manna from heaven seemingly alighting upon our more successful counterparts, it’s no surprise we cannot help but wish, or even covet what others have achieved. But what may be surprising is how envy can also extend itself into the ranks of the wealthy. Get a load of this New York Times article entitled How The Rich Envy The Super-rich. I found this to be unfortunate: envy is something you could harbor no matter where you are in the economic scale, which is something often caricatured by soap opera plots like Dynasty for instance.

But irrational as it may seem, there are some reasons that can explain why rich people are envious of each other:

Why The Rich Are So Envious

They are inherently competitive, type A, OCD (or obsessive-compulsive) types.
They’re proud of their ulcers but that won’t stop them from hyper-focusing on knocking off the next guy on the Forbes list. You see, they’re all neighbors who live in the same cul-de-sac, and the Joneses are them. From a former Paypal executive (courtesy of that New York Times article):

“It’s kind of embarrassing,” said Mr. Hoffman, 39, whose start-up, a business-oriented social-networking site called LinkedIn, is almost four years old. “You started a year or two earlier, and they start after you and then this thing zips right past you and gets the golden results.”

Envy is all about comparison.
Before you criticize these rich guys for feeling this base human emotion, just ask yourself how much it makes sense for a beautiful actress to feel ugly while surrounded by gorgeous models. Same thing?

Reference points only make matters worse, Mr. de Botton said. He pointed to research that has been done on attractive women who feel ugly when surrounded by images of more beautiful women. “Very often the problem isn’t so much what an individual happens to look like, but the extraordinary comparisons being made,” he said.

These rich people just want more respect.
They all live, work and play in the same intense fishbowl, so they’re all jockeying to be the alpha guy or gal.

“It can seem like the only way to be respectable is to achieve as much as the founders of YouTube or Google,” said Alain de Botton, author of “Status Anxiety” (Random House, 2004).

Wealth creates pressure.
To those much is given, much is expected, as the saying goes. So it’s hard for these people to sit on their previous laurels without something to prove yet all over again. These people, in particular, don’t want to be labeled “has-beens”.

With rewards of that scale on the horizon, the pressure to make a fortune can be enormous, and people have different ways of coping with it. Some find inspiration in others’ success, while some spend tremendous amounts of psychic energy worrying about how rich their friends are.

So you know what else? I’ve realized that it’s this very envy that causes the rich to get richer. It’s what makes them get up every morning to keep innovating, creating and producing, even if they no longer have to.

Yet one would-be entrepreneur’s inspiration is another’s sense of pressure. “Cynics would say you need this kind of pressure or people won’t achieve, that you only produce these great results if there’s this kind of tension in the air.”

The rich are different from you and me: just check out this bit on the millionaire secrets of the super rich. Seems like wealth can do a number to your sense of perspective, and can in fact be highly problematic for some. It may make more sense to us though, if we could imagine what it would be like to sit on millions (or even billions) of dollars, to be hugely successful and to be at the helm of important companies, institutions or groups. Presumably, you’d think differently and probably have to act differently, no?

How To Channel Envy Into A Positive

Anyway, someone out there has come clean about being envious about a former college roommate’s current success.Lazy Man has confessed about some deep thoughts and honest feelings he’s had about an old friend who is now a successful VP at a financial institution whom he rediscovered via Linked In, a networking site ironically created by that very same envious former PayPal executive I cited earlier. Don’t worry about feeling this way though, because this is a very common scenario that occurs very often… especially here in the Valley. If I got jealous over every person I’ve known and met throughout my career who are now multi-zillionaires, well I’d be a bitter wreck by now.

This negative thing can always be turned into a positive. Although there are articles out there that may advocate that you avoid the affluent Joneses because they can be toxic to your wallet, I have some different views. You can also certainly use the power of distraction and some will power to make the green-eyed monster quit eating you from the inside out, but I’d rather suggest this:

Get inspired.
The stories of the rich and wealthy can just be the ticket to get you going and motivated. Sure, it’s easy to fall into the temptation of feeling like “life isn’t fair” and asking why you’re not getting what you deserve, but the way to success is to move in a different direction. Turn the gap between you and the other guy into a goal and soon you’ll find yourself further along in your plans than you first thought. Find inspiration in others’ stories, not discouragement.

Capitalize on established connections with successful people.
Looking at the bright side, the LinkedIn application itself may just be able to serve its purpose. Networking is one huge way to get further ahead with your endeavors. Around here, it’s the lifeblood of business startups, career advancement, deal-making. Just ask those You Tube fellas, whose billion dollar brainchild is actually the product of incredibly successful networking relationships. Rekindle old relationships and hitch yourself to their stars. Who knows where their success and connections can take you!

Still, I must admit, a few pangs of envy hit me now and again as well. But they don’t last too long thank goodness.

You are right, it never ends. Just today I saw an old start-up that I used to work at featured in the last issue of Business 2.0 magazine. At least I still own some stock there – not enough to get rich, but possibly enough for a down payment on a home (not in Silicon Valley) someday.

MoneymonkOctober 2, 2007 at 9:54 am

Amen! Power of Association is always good. They also have the energy to move forward. And they don’t sit around and blame others for their mistakes.

‘Get inspired’ is all well and good. And it’s a nice idea. But the bottom line is lots of people work very hard at things they’re passionate about and don’t become rich and/or successful.

It’s not a personal failing on their part. The fact is, we live in a winner-take-all society. I strongly believe that is why the rich get richer and the bottom 80% of Americans got poorer in real terms since the 1980s.

Brip BlapOctober 2, 2007 at 6:15 pm

I wish I remember who said this, but I heard a movie star (I think it was Brad Pitt) respond very well to a question from a reporter when asked ‘you have millions and millions – when is it enough’?

The answer: ‘when I have just a little bit more’.

Don’t forget that our government is made up of rich people who favor the rich in the tax code – that’s why we have taxes on earnings that are significantly higher than taxes on capital gains. Not saying that’s a bad thing, but it clearly favors the wealthy.

I hope I’m wrong but I think wealth inequality is going to be a real source of strain in this country in the next decade or two.

ShadoxOctober 2, 2007 at 8:31 pm

Here’s another reason:

If you get the same return on your investments, but you start out with more money, you earn more. Money begets more money.

Also, the rich get more of their income from investments, rather than from work. Capital is taxed at a lower rate than wages (not necessarily a bad thing), and it is scalable to make money from capital: you can only work one job, but your money can continue to work around the clock.

60 in 3October 3, 2007 at 9:06 am

I agreed with this entire article except the point about taxes. The wealthier you are, the more taxes you pay. The wealthiest portion of America pays a very large amount of our tax base. However, they also pay more attention to ways to avoid this, which is why people might think they pay less taxes. The same loop holes open to the wealthy are also open to everyone else, they just choose not to use them.

For example, I frequently see friends with little money throw away their old PC’s. Why? Those PC’s could be donated for close to their full value in a tax deduction. Old clothes? Donate them. Take advantage of 401k’s. Hold investments longer.

I recently started my own blog. It’s nothing fancy, just a little website about fitness and health, but now I can write off expenses like an ISP and a computer. I didn’t start the blog as a tax deduction, I started it because I enjoyed writing about the topic, but I am aware of the tax ramifications and I choose to take advantage of them.

There are numerous ways to minimize taxes if you just look for them.

Gal

CurtisOctober 5, 2007 at 6:37 am

I agree with Gal on the taxes. I just reviewed proposed “Flat Taxes” on my blog yesterday. From IRS data, I found that the top 2% of income earners made 21% of the national income and paid 35% of the national taxes. It was an average tax rate of 25%… mine is only like 13%.

Lazy: A lot of my friends have the same thoughts as you. I would too but I have a lot of family here…

Mats: great link, I appreciate it!

KMC, Moneymonk: I agree that it’s all within our power to determine who gets wealthy. But yes, luck plays a big role in this as well.

Brip Blap:
You have some points about the wealth inequality situation. Compared to other parts of the world, we’re not so “unequal” just yet. But the gap is widening and it has not been more obvious than in some states like California where a lot of new immigrants settle down and a lucky several become instant multi-millionaires in a heartbeat. I’m not sure what the consequences of such widening gaps are over here — who knows, a new administration may help turn things around.

Shadox, absolutely. There’s a tipping point somewhere though — when does it become “easier” to make that money? When you are able to make that money work for you and give you a hand.

60 in 3: I agree that there are tax breaks everywhere. But, I’ve seen how taxes ravaged my take home pay being a relatively high-income earner. There was a time I hit that ~50% marginal tax bracket and was never more frustrated. But I suppose that was my problem — I should’ve found ways to capitalize on the tax breaks. The point here is that most people don’t. And the rich do, who have a lot of resources behind them to help them figure out the loopholes. Plus, they have huge businesses so those tax advantages can be huge as well.

Curtis: I support flat taxes! Give me that, anytime!

Mark McGuireOctober 5, 2007 at 6:49 pm

I wonder if it would be a different story if the rich were just getting richer on a steady basis because the poor are getting poorer in a steady basis through overspending, rising interest rates, mounting credit card debt.

Is it really in proportion?

Veteran Military Wife at Life Lessons of a Military WifeOctober 22, 2007 at 5:30 am

The rich also use the power of negotiation by never paying the retail price, and they buy mostly appreciating assets…not to mention..using leverage and OPM (other people’s money) to make a buck….until the rest of us figure that out…we will continue to be either poor or grudgingly middle class!

Chris NaadenDecember 2, 2007 at 9:12 pm

#5. It was J. Paul Getty.

BoobooMarch 30, 2011 at 10:09 pm

This article is naueseating and the writer has their head buried in the sand. You don’t think companies (and the rich f*ckers) who run them look for ways to trick people and keep them economically enslaved? Just look at the nefarious practices of credit card companies and banks. Enough said.

Capitalism is morally bankrupt — there are no checks and balances and no real safety net for the lowest classes or those who don’t agree that trying to get rich is what life’s all about.

I’m wondering when the real revolution is going to start, when people are going to start trying to kill some of these as*holes.

@Booboo,
Things have changed quite a bit since the heady 1990s, and in fact, things have toned a lot since the 2008 financial crisis. Most people nowadays are much more subdued about how they think about and deal with their money. From what I’m seeing, the whole greedy lifestyle that is usually alive and well during economic bubbles is now passe, at least until the next bubble starts inflating.

With people still smarting from the past recession (which threatens to double dip at this time), I doubt we’ll hear much about how the rich are conducting themselves (for a while). And as I see it, America is quite far from being a class-centric society, so I doubt that the condition of the economy could ever spark any kind of revolution.

I thought it was an interesting exercise to take a look at this aspect of human nature though. A lot of rich folks are really just in competition with their peers and use money as a way to measure their worth. Quite sad, if this is how one thinks.

millettemanaogMarch 31, 2011 at 12:26 am

Rich people and their “frienemies”.

Rob BennettMarch 31, 2011 at 4:51 am

My view is that capitalism is both the most moral system of all AND the least moral system of all.

It depends on whether there is something outside of capitalism stopping the greed from getting out of control. When there is no effective brake (religious beliefs or non-religious ethical beliefs), capitalism eats us all (including the rich) alive. When there is an effective brake, capitalism facilitates the growth that take us higher and higher and higher (I don’t mean just in material terms but in spiritual terms too).

I love capitalism. But I fear what it can bring about when it is uncontrolled. And I don’t think government controls are effective. I think the controls have to come from within the people living in the capitalist society. We have to CARE about helping as many people as possible moving up the ladder. When we care, we figure out a way to make it happen and all is well. When the number going up the ladder grows too small, this system destroys itself.

It was good to see Shadox’s name appear up above. You’ve been MIA too long, old friend!

Rob

VAMarch 31, 2011 at 10:39 am

Some good thoughts Rob. Too many people rattling off about capitalism being bad and stuff. What about the other countries where capitalism is being introduced and taking root? Let’s check them out: China has becoming more and more capitalistic. Cultural changes abound. While things can be good, and wealth builds for the country, you can go the other direction too. Things can swing the other direction and stuff like this imbalance of wealth happens in a big way. Food for thought.

JackieMarch 31, 2011 at 9:14 pm

I think you might be onto something here. I know that envy is definitely a signal that you want something that other people already have, whether that’s spare time, riches, or a new car. And if envy motivates you to recognize your desires and *so something* about them, that can produce some great results.

Jeremy StreichApril 6, 2011 at 7:45 am

Actually Curtis’s post proves the “Tax Break” point incorrect. The rich pay more in taxes, there is no magic secret deductions here.

The later half about envy is also misplaced. Dr. Stanley (Millionaire Next Door, Millionaire Mind, etc.) shows that most wealthy aren’t who the “experts” think they are, and they made their wealth by not engaging in status race, but living in neighborhoods with average pay and net worth substantially lower than theirs. They own used cars, they don’t buy super expensive status items and most of them don’t care about keeping up with Joneses.

Then again, most of the article isn’t about average “Millionaire Next Door” rich, it’s about the “super rich”; which likely is what makes the difference.

Marie@familymoneyvaluesApril 6, 2011 at 1:20 pm

@Jeremy – you have hit the nail on the head with your comments. Dr. Stanley’s Millionaire Next Door types may have more money than most, but they are not the ultra rich. In other words, a million dollars isn’t what it used to be!

I like that you study rich people to see how they are different than you. I don’t think most people get around to doing that. Most of us just bumble our way through life, doing what we grew up with.

Children usually emulate those around them when growing up and into their adult selves. If they are surrounded by motivated, successful, resourceful people, then they stand a better chance of being the same. If they are surrounded by people plodding through life, complaining about unfair treatment, and not doing anything to better their situation, then the children will probably emulate those traits.

Way To Wealth GuyMay 17, 2011 at 3:38 am

To rich or not to rich: All depends on what you want out of life. And you have a choice. Do you have the courage to make your envies a reality, or would you rather ‘bumble your way through life?’ Rich people are a lot of things: negotiators, asset collectors, well connected, OCD…but wealth is a niche sport, not a mass market strategy. How did all the rich people out there get rich? They find a niche market to dominate.

Cheers!

SB (One cent at a time)May 26, 2011 at 8:50 pm

This is a very good post! We can also think that rich has more capital already, hence their money will grow more rapidly in absolute terms, even if rate of growth is same as that of a non rich.

You get $5 at 5% rate with an investment of $100, some one else gets $10 at 5% rate with his/her investment of $200!

Just wanted to share that in the Valley, when the rich gets richer, it causes some kind of trickle down effect. One particular consequence of this phenomenon is how real estate prices tend to be sticky in the SF Bay Area (proper). Serial entrepreneurs are on the hamster wheel, much like everyone else, but they sure enjoy their work a lot!